Size and Soft Budget Constraints

38 Pages Posted: 7 Dec 2006

See all articles by Ernesto Crivelli

Ernesto Crivelli

International Monetary Fund (IMF)

Klaas Staal

Institute for International Economic Policy (IIW), University of Bonn

Date Written: November 2006

Abstract

There is much evidence against the so-called "too big to fail" hypothesis in the case of bailouts to sub-national governments. We look at a model where districts of different size provide local public goods with positive spillovers. Matching grants of a central government can induce socially-efficient provision, but districts can still exploit the intervening central government by inducing direct financing. We show that the ability of a district to induce a bailout from the central government and district size are negatively correlated.

Keywords: bailouts, soft-budget constraints, jurisdictional size, public goods, spillovers

JEL Classification: H4, H7, R1

Suggested Citation

Crivelli, Ernesto and Staal, Klaas, Size and Soft Budget Constraints (November 2006). CESifo Working Paper Series No. 1858, Available at SSRN: https://ssrn.com/abstract=949711

Ernesto Crivelli (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Klaas Staal

Institute for International Economic Policy (IIW), University of Bonn ( email )

Lennestr. 37
Bonn, 53113
Germany
+49(0)228 731885 (Phone)

HOME PAGE: http://www.iiw.uni-bonn.de/people/staal/index.html

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